Australian shares closed lower on Wednesday in a low-volume session, after resuming from an extended holiday weekend, as investors assessed the impact of China dismantling COVID-19 curbs amid high inflation and a policy tightening environment.

The S&P/ASX 200 index ended 0.3% lower at 7,086.4, with daily trading volume of 420.4 million shares — the lowest since early-January this year.

The benchmark was set to post a yearly decline of about 5%, marking its worst year since 2018.

Sentiment has been affected across the globe as fears of aggressive rate hikes by the U.S. Federal Reserve and other major central banks continue to affect growth prospects, with rising COVID cases in China further prompting a sell-off.

However, Brad Smoling, managing director at Smoling Stockbroking, expects the Reserve Bank of Australia to pause or lessen the quantum of their rate hikes, and forecasts a "very positive" first quarter.

"A lift in China is extremely good for Australia" not only from exports but tourism perspective as well, Smoling said, adding it was one of the major factors for a positive outlook for the first quarter.

Local banking stocks were the top losers in the benchmark on Wednesday, declining 0.8%. All the "Big Four" banks slid, with top lender Commonwealth Bank of Australia down 1.6%.

Lithium stocks dragged the larger index down with majors like Allkem, Pilbara Minerals and IGO down between 2% and 4.1%.

Whitehaven Coal and Yancoal dropped 7.2% and 2.9%, respectively as coal miners tracked the broader mood.

Energy and mining stocks were the bright spots on the index with energy index gaining 1.5% and mining shares adding 0.3%.

Meanwhile, pure-play renewable energy and storage firm Genex Power fell 18.8% after its $233.06 million buyout bid from consortium led by Atlassian co-founder Scott Farquhar fell through.

New Zealand's benchmark S&P/NZX 50 index gained about 0.4% ending the day at 11,539.31 points. (Reporting by Rishav Chatterjee in Bengaluru; editing by Uttaresh.V)